Question

# Solve using excel SHOES "R" US has bonds on their balance sheet in the amount of...

 Solve using excel SHOES "R" US has bonds on their balance sheet in the amount of \$5,000,000 in book value. Those bonds mature in six years. The Company is thinking of buying the bonds back now because yields are 3% while their bond pays 7% annually. 1. What should be the price in the market of 1 SHOES "R" US bond today? 2. How much money would SHOES "R" US need to raise to return the entire amount of bonds outstanding?

Price of the bond is the present value of all the future cash flows discounted at the yield to maturity

Price of the bond = Face value / ( 1 + yield to maturity)^n + coupon [ 1 - ( 1 + r ) ^-n] / r

where n = years to maturity

r = yield to maturity

Price = 1000 / 1.03^6 + 70 * [ 1 - 1.03^-6] / 0.03

= 1000 / 1.194052297 + 70 *( 1 - 1/1.03^6 ) / 0.03

= 837.48 + 70 ( 1 - 1 / 1.194052297) / 0.03

= 837.48 + 70* 5.417191467

= \$1216.68

Amount of money would SHOES "R" US need to raise to return the entire amount of bonds outstanding

= 5000000/ 1000 * 1216.68

= \$6,083,400

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